Daily Gains Letter

Three Silver Plays That Can Weather a Short-Term Downturn

By for Daily Gains Letter |

Three Silver PlaysTechnically, the Federal Reserve’s job is to oversee the monetary policy (short-term interest rates) of the world’s biggest economy. Obviously, it does, but it’s also important to remember that its opinion and carefully chosen words also have a major impact on the global markets and world economies.

If the Federal Reserve says the U.S. economy is doing well, investors flood the markets. If, on the other hand, the Federal Reserve says the U.S. economy is having difficulty gaining traction, investors turn their attention to precious metals to hedge against a weak U.S. and global economy and inflation.

It’s worked like clockwork since the Federal Reserve stepped in to help kick-start the U.S. economy with its generous monetary policy after the markets crashed. During the first round of quantitative easing (November 25, 2008 to March 31, 2010), silver climbed 65%.

Sensing the economy was still unstable, the Federal Reserve initiated its second round of quantitative easing (November 3, 2010 to June 30, 2011), during which time silver climbed an additional 39%. In September 2012, the Federal Reserve commenced its third, open-ended round of quantitative easing. If history is any indicator, the third round of quantitative easing should have been a boon for silver—but it wasn’t.

Silver prices edged steadily lower over the ensuing months. In April 2013, The Goldman Sachs Group, Inc. famously trimmed its outlook for gold to $1,450 an ounce by the end of 2013 and $1,270 at the end of 2014. The company noted that the banking crisis in Cyprus didn’t have the expected positive effect on the price of gold.

Silver and gold prices fell lower in May 2013, after the Federal Reserve hinted it might begin to taper its $85.0-billion-per-month quantitative easing policy. This intensified last June, when the Federal Reserve said it was probably going to taper its monthly quantitative easing policy by the end of the year.

Silver and gold prices experienced an unexpected pop in August on fears the U.S. would invade Syria. An ally of Russia, any attack on Syria, it was feared, would extend well beyond the border. This didn’t materialize, and prices for the white precious metal trended lower, where they have been seesawing ever since.

The seesaw edged lower last week, though, when the Federal Reserve said it will raise interest rates sooner than expected, signaling the U.S. economy is on stronger economic footing. However, recent economic data is calling that optimism into question.

The Conference Board announced on Tuesday that consumer confidence levels increased to 82.3 in March from 78.1 in February. Analysts had forecast consumer confidence levels to rise marginally to 78.7.

On the same day, the United States Department of Commerce reported that February new-home sales fell 3.3% to a seasonally adjusted 440,000 units. New-home sales were forecast to come in at 447,000.

It seems investors consider the Federal Reserve’s outlook more reliable than new-home sales data. As a result, silver and gold prices have been trending even lower.

With silver prices now below $20.00 per ounce, many investors are wondering if they should flee from precious metals. For starters, it’s important to maintain a well-balanced investing portfolio—and that includes a space for silver. At current prices, those considering silver should look at some of the stronger contenders, the companies that can weather lower silver prices and thrive when prices rebound.

Two silver stocks with low operating costs, strong assets, and a strong balance sheet include Tahoe Resources Inc. (NYSE/TAHO, TSX/THO) and Pan American Silver Corp. (NASDAQ/PAAS, TSX/PAA). If you’re interested in an exchange-traded fund that tracks silver mining companies, you could start with Global X Silver Miners ETF (NYSEArca/SIL).

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